Many things are said to be at the discretion of an employer. It is common to see phrases like “the Company shall, at its absolute discretion, be entitled to….” in employment contracts or policies. If these words appear, does this mean that the Company has carte blanche to do as it wishes? In the case of Zuraimy Bin Kushaili v Sarawak Energy Bhd [2021] MLJU 286, interpreting the phrase “absolute discretion” came into sharp focus, specifically whether the “absolute discretion” to choose between one of two options also meant a discretion not to have any option at all.
Brief Facts
- The Plaintiff was initially employed on a permanent basis, but in 2013 was offered to be placed on a fixed term contract for 3 years.
- Under Clause 13 of the fixed term contract, if the Defendant decided not to further renew the contract, then the Defendant “reserved the right, at its absolute discretion” to offer the Plaintiff one of these two options:
- Option A was a retirement benefit equivalent to the sum of two years of salary.
- Option B was to re-appoint him to his pre-contract salary grade, with no loss of seniority in service.
- The Plaintiff agreed to be placed on a fixed term contract.
- In January 2014, the Plaintiff was informed that his contract would be terminated early at the end of the month.
- The Plaintiff requested that he be offered either Option A or Option B, but was informed that the Defendant decided not to offer either option.
- The Plaintiff commenced legal action against the Defendant.
- The Plaintiff’s claim was dismissed by the High Court. The High Court was of the view that the Defendant was within its contractual obligations not to offer either Option A or B since they also had the discretion not to choose.
- The Plaintiff appealed to the Court of Appeal.
Court of Appeal’s Findings
At the Court of Appeal, the primary issue was whether Clause 13 allowed for the third option of terminating the employee’s employment with no retirement benefits. It was also disputed whether the phrase “reserved the right, at its absolute discretion” should be interpreted to mean that the Defendant would have the right to not exercise either of the two options available.
The Court of Appeal interpreted Clause 13 to mean that the Defendant has a right, in its absolute discretion to exercise one of the two options. However, this did not mean that the Defendant has the right to “take away” its offer of both options. If the Defendant wanted to have a third option (no offer at all), it would have been spelt out in the contract. The “absolute discretion” here was the Defendant’s right to choose between two options, but not a discretion to refuse to make any offer whatsoever.
To bolster its interpretation, the Court of Appeal also applied the purposive approach in interpreting the contract. The Court of Appeal held that it would be commercially irrational for parties to have agreed for the Defendant to have a right to choose between Option A, Option B, or not at all. This was given the context where the employee had converted his permanent contract of employment to a fixed term contract:
“Here it does not make commercial sense, let alone compute with common sense, for an employee in senior management, to have agreed to convert a permanent contract of employment to that of a fixed term without the safeguard of either a retirement benefit upon the expiry of the fixed term, in this case 3 years, or to be placed back into the previous permanent contract with a lower salary grade but with no loss of seniority. Granted the choice of either of the two options of (a) or (b) is entirely left to the absolute discretion of the company
[…]
The company had a choice if it does not want to pay the retirement benefits of 2 years last drawn monthly salary to exercise option (b) and put the employee back into the old permanent contract scheme based on the previous salary grade with no loss of seniority.
To say that the company can have a third option (c) to neither exercise either option (a) or (b) would be repugnant to the whole scheme of conversion of the employment contract from permanent to fixed term for some increase in salary with no retirement benefit whatsoever in the case of early termination of the employment through effluxion of time once the initial 3 years is over.
The employee would have been short-changed and indeed it would be unfair labour and industrial relations practice.”
The Court of Appeal reversed the decision of the High Court and found in favour of the Plaintiff. The Defendant had to pay the Plaintiff a retirement benefit of RM600,000.
Key Takeaways
In a contractual dispute, the courts may adopt a purposive approach in assessing whether a particular interpretation makes commercial sense. Here, the Court of Appeal was aided by the historical context of the contract, whereby the employee would not have agreed to the new contract if it meant he was not given a safety net of confirmed retirement benefits.
At a first reading of Clause 13, one might have easily come to the same conclusion as the Defendant, that an “absolute discretion” to offer one of two things meant that the Defendant also had a discretion not to give anything. However, in deciding, the Court of Appeal examined the literal and ordinary meanings of the words “reserve its rights” and “absolute discretion”, by referring to law dictionaries and lexicons, and confined the discretion based on the rest of the clause. (“One cannot truncate a sentence half way through without asking what was being qualified…”)
Employers may want to relook their existing contracts and policies, and examine whether they can be clearer to avoid similar disputes. For example, a clause that states “The Employer has the absolute discretion to offer Option A, Option B, or nothing at all” could have had a different outcome.
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This article was written by Donovan Cheah with assistance from Leia Inanna (Intern). Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.
